Financial Times

IMF: Government committed to implementing programme


CB Governor Ajith Nivard Cabraal speaks to reporters about the IMF loan. Pic by Dinuke Liyanawatte

The International Monetary Fund (IMF) said this week the government of Sri Lanka is committed to implementing an ‘ambitious’ programme to address the problems and root causes that created vulnerabilities for the economy. During a conference call with Sri Lankan and international journalists on Monday, the IMF’s Mission Chief for Sri Lanka Brian Aitken said the IMF feels it is a strong programme and if implemented, would put Sri Lanka on a much stronger basis for higher growth in the future in addressing the post-conflict reconstruction needs. “The IMF Board would not have endorsed this programme if we did not feel like the government has the desire and the capacity to implement it,” he said.

Fielding questions from reporters, Mr. Aitken added that the US$2.6 billion stand-by arrangement does not directly fund the government’s budget efforts but is lent entirely to the Central Bank to rebuild reserves. He said the hope is that the loan provides a framework in which the other donors, the multilaterals and bilateral donors can support the reconstruction effort directly. According to Mr. Aitken, the end of the conflict will have a positive impact on Sri Lanka’s growth and expects there to be higher foreign direct investment.. “We would expect there to be an increase in and opening up in a way of areas that were under the conflict in the North.”

Asked about human rights issues, Mr Aitken said they were aware of the human rights issues and the humanitarian situation. “As a mission chief, and as any mission chief would, it’s my job to talk to a wide range of people and institutions beyond just the government,” he said, adding however that in Sri Lanka’s case, they have been hit by the global crisis, and the IMF’s mandate is to address and ward off balance of payments crises.

He said this crisis would have a devastating impact on the economy and on the people, particularly the most vulnerable ‘as we’ve seen in other countries. So our job, our mandate is to prevent such a crisis.’
Mr. Aitken explained that the government’s programme aims to reverse the decline in tax revenue which has taken place over the last several years. The main instrument, as mentioned in the Letter of Intent, is that the government has currently set up a tax commission to review the entire framework with the idea of broadening the base and reducing exemptions. This, the government feels, is necessary both to reduce the budget deficit but also to finance and to provide the resources to pay for the government’s reconstruction needs to rehabilitate the North and the East.

Mr. Aitken said the IMF does not target the exchange rate and does not have any specific exchange rate target or projection and cannot determine at this point how the exchange rate will move. The programme targets reserves and depending on the supply and demand for foreign exchange to meet those reserve targets, the exchange rate will be the one factor that equilibrates the supply and demand. However, he said the reserve targets are the foundation of the programme. He also said it is under consideration that the IMF may set up an office in Sri Lanka.

Fund Directors overseeing Sri Lanka make presentation
IMF’s Alternate Executive Directors for Sri Lanka Adarsh Kishore and K.G.D.D. Dheerasinghe, who made presentations to the IMF Executive Board on Friday last week prior to the approval of the stand-by arrangement, released that statement to the Sunday Times FT, where it is stated that the Sri Lankan authorities have a clear understanding of the goals and sequencing of the Fund programme.

The proposed Stand By Arrangement with the IMF will boost investor confidence and help the country in passing through this challenging period towards successful implementation of reconstruction and development programmes in the war torn areas, while also making progress in the development programmes in the rest of the country.

Mr. Kishore and Mr. Dheerasinghe stated that the Sri Lankan authorities are fully committed to implementing the programme in all aspects. They said the authorities are confident that with the support of the Fund, the Sri Lankan economy will return to its trajectory of high growth with stability by the end of the programme.

They stated that revenue performance projected at 14.8% of GDP for 2009 is expected to be achieved despite adverse global conditions. In terms of exchange rate policy, Mr. Kishore and Mr. Dheerasinghe said the Central Bank has allowed greater flexibilit in recent months to facilitate adjustments in view of the global economic crisis and to build up its international reserves.

The Central Bank has not engaged in the sale of foreign currency in the market since late March 2009 and has purchased US$704 million from the market since then, helping to arrest appreciation pressure whilst building up its external reserve position.

However, they said the gross official reserves need further strengthening to ensure sustainable macro economic stability even though reserves have improved by 48%.

Loan will not increase national debt, says CB

By Dilshani Samaraweera

The Central Bank says the US$ 2.6 billion IMF loan will not add to Sri Lanka’s national debt, already at 81% of GDP by last year. “The IMF loan will not add up to public debt figures, or government accounts, because the loan is given to the Central Bank and not to the government. So the impact on public debt will be zero. The government will also not have to repay the loan. The money goes on the Central Bank’s balance sheet and will be repaid by the Central Bank,” the Director of the Economic Research Department, Central Bank, Dr P N Weerasinghe, told the Sunday Times FT this week, during an interview.

The loan, the interest and the surcharge, will be repaid by reinvesting the money outside the country. Repayments must start in 2012, over a period of 4 years. “We will reinvest the funds outside the country. The net investment earnings will be positive because this is a concessionary loan and the interest rates are low. So we can pay back the capital, the interest and the surcharge. But in the meantime the money will build up national reserves and will avoid balance of payment difficulties,”said Dr Weerasinghe.

The IMF’s Stand-by Arrangement loans are given to avoid balance of payment crises. Sri Lanka’s foreign exchange reserves are threatened by the global recession. So, the Central Bank says the IMF funds will be used primarily to top national foreign exchange reserves.

The Central Bank also maintains that the government cannot directly get at the IMF money. The Central Bank insists that the IMF dollars will simply be available for the country - including the government and the private sector - to make foreign currency payments. To use the money, both the government and the private sector will have to buy the dollars.

“This money is not automatically available for the government to spend on its projects or to repay its loans, because the money is given to the Central Bank. If the government wants the money, it will have to pay in rupees and buy the dollars. But for this, the government must have money to buy dollars,” said Dr Weerasinghe.

The government can raise money through taxes, loans or through Central Bank lending on government securities. However, the Central Bank says the government does not need to introduce new taxes. Incomes from existing taxes are expected to increase from the second half of this year. Import taxes for instance, are expected to increase as imports are expected to grow with conflict rehabilitation and more economic activities. The government is also trying to capture the majority informal sector into its income tax net.

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